Monday, August 29, 2011

The investigation into the alleged manipulation of the LIBOR rates during the financial crisis of 2007/8, have unearthed additional evidence of what appears to be a series of insider dealing rings at some of the largest global investment banks.

A report in the Daily Telegraph of 29th August examines the background to these investigations, and refers to enquiries being undertaken in the US and in the EU, and has elicited a statement from one source close to the investigation that states; '...What seems far more certain is that some individuals will be facing prosecutions for more traditional market abuse...'

The report goes on to state that banks on both sides of the Atlantic are allegedly involved in the investigation including Barclays, Lloyds and Royal Bank of Scotland, all of whom have revealed that they are part of the investigation.

If prosecutions do emerge from the insider dealing allegations, it is believed that they will commence in New York.

Such an investigation and prosecutions would be a very good thing, if for no other reason than they have a far better prospect of success in the US, and the consequent sentences imposed upon conviction will be more severe.

It has taken the US to lead the way to demonstrate to the rest of the international banking community that they must not assume that they are immune from prosecution, if they commit serious criminal offences.

For too long, selected areas of the banking sector have behaved with a cavalier disregard to the requirements of international criminal law, and for too long, respective Governments, including the UK, have allowed banks to continue to commit crimes as if they were uniquely immune from the laws which govern ordinary criminal behaviour.

Onlyby criminalizing these people and locking them up for a significant period of time, will the message get through that they are not the protected species so many of them consider themselves to be.

The Daily Telegraph report states quite openly that for the LIBOR prosecution to succeed, the authorities will have to prove that there was collusion at the highest level among banks. If this is the case, and there was a criminal conspiracy of such a kind, then these actions have to be construed within the organised crime continuum, because that is where they truly belong.

Only when Governments begin to realise that such crime, albeit committed in the banking suites, is as much 'organised crime' as any other example of the genre, will they begin to find other, more effective ways of dealing with these activities.

Tuesday, August 16, 2011

There has been much loose chatter about the adoption of so-called 'Zero Tolerance' policing methods, to begin to make inroads into social crime environments. Jack Straw used to wax lyrical about their use and many other politicians have begun to extol the virtues of US-style policing models, as a means of tackling the inner-city gang crime culture.

As is so often the case, politicians fail to understand the reason for the adoption of these tactics in America, and they reach out for the sound-bite, as opposed to the reality.

So-called 'zero tolerance' policing grew out of 'the broken-windows theory' of urban degeneration, which posited that where early signs of decay or social damage, or the commission of minor offences was observed, by taking immediate and robust action, more serious criminal activity could be quashed in the bud, leading to a fall in crime numbers.

So popular did this theory become that it was widely adopted in a number of major US cities. It had one hugely successful, and originally unforeseen consequence, which enabled US police to make major inroads into levels of serious crime among gangs, hitherto considered impossible.

It is this aspect that politicians are lauding when they talk about 'zero tolerance', but ironically, we do not need this application in the UK.

In the US, the powers of the police to stop and search suspects for carrying drugs, illicit firearms, other weapons, or stolen goods are hugely constrained by US Federal law. In so many cases, the relevant offending items are discovered as a result of a search, which can quickly be deemed 'illegal' because the officer cannot demonstrate that he had 'probable cause' for the making of a search of the defendant or his house or his car at the time. If the search is deemed to be illegal, then any articles discovered as a result of the search, are deemed to be inadmissible in evidence, and many gang members had walked free from court despite being found in possession of serious weapons or firearms.

Such a loophole had caused great soul-searching to the US police because it meant that it was becoming well-nigh impossible to tackle street gangs when seen in the community.

This was where 'zero tolerance' came to the rescue.

Recognising that street gangs demanded high levels of 'respect or 'street cred', a concept not hitherto unknown in Tottenham or Brixton, the cops quickly realised that issuing summonses for minor offences such as jay walking, public urination, drinking alcohol in a public place or any of a list of minor 'citable' offences, would so offend the gangster's sense of dignity, that the summons would be completely ignored.

All the police then had to do was attend the summons court on the due date, and upon the defendant's non-appearance to answer the summons, obtain a warrant for his arrest. Such a warrant gave a right to enter the defendant's apartment, by force if necessary, to effect the arrest, and while lawfully in the premises, who could possibly know what other incriminating items in the form of drugs, guns, knives or stolen goods might be found in the course of the search, none of which could be challenged in court as being illegal, and the defendant would be charged accordingly.

The effectiveness of this method soon became a favourite ploy of police, indeed, special warrant squads were formed, to hit the homes and squats of the criminals, few of whom seemed to learn the lesson of the issuance of a summons, and continued to refuse to acknowledge its receipt, preferring to risk a raid sooner than appear to lose face by answering a summons!

That was the main reason behind the apparent success of 'zero tolerance' in the US, because it resulted in a very large number of hitherto perceived 'untouchables' finding themselves banged up with maximum prejudice.

We, in the UK, do not have the same problems associated with the legality of producing items seized in a 'stop and search' exercise, so the need for such actions are not called for in this country. We could and should make more use of the summonsing power under the Motor Vehicle Construction and Use Regulations to harass criminals, particularly those who like the 'cred' the possession of certain types of vehicles gives them,and we should do everything in our power to get them disqualified from driving, but we must accept that these are only disruption exercises, valid though they may be.

Let our politicians start listening to experienced police officers first about what does and does not work against criminals, and stop reaching for populist sound-bites, and we might start to get somewhere.

The first thing they must do is to begin to restore and mend the morale of police which was so damaged by the misplaced findings of the McPherson Report. They must restore the recognition that policing involves the use of 'force', it is not a social-work agency or service. Police must be allowed to become far more robust in their dealings with gangsters, and those whose actions are akin to a new model of urban terrorism, so as to begin the take the fight back to the enemy and reclaim the streets.

Let the police become more resolute in their ambition to lock up those who would use violence, intimidation, riot and affray to get their own way, and let them get the support they need from the Courts.

In the 1950's there was dangerous gang violence on the streets of West London, directed by gangs of white gangsters, and aimed at black immigrants, who were intimidated and hurt by these unwanted and largely unprovoked attacks. The courts responded by handing out very lengthy prison sentences to those who were apprehended, and it did not take long for the message to be heard. The violence was quashed in the bud. It can be done again, without needing to import other methods which simply would not work effectively here.

Rowan Bosworth-Davies is a member of the Standing Group on Organised Crime.

Wednesday, August 10, 2011

Listening to the media in these last few days, I have been swamped by the plethora of opinions seeking to explain the recent rioting in London and elsewhere.

It is pointless refusing to try and understand why these events are occurring because they will inevitably re-occur, and we shall not have leaned any lessons from the experience.

Much of the explanation, I believe, lies in the cultural mind-set of the groups of people who are committing much of this violence. It is a mind-set moulded by failing social background, role-model absence, educational rejection, all leading to a recognition that access to the traditional status of success in the eyes of the community from which they come, is denied to them. If they cannot achieve ownership of the trappings which designate success by lawful means, they will do so by criminal means.

Emile Durkheim defined this kind of conduct as 'Anomie'.

According to Durkheim, anomie is a breakdown of social norms and it is a condition where norms no longer control the activities of members in society. Individuals cannot find their place in society because they either have no clear rules to help guide them, or they have rejected those standards. Rapidly changing social conditions as well as a need to adjust to widening disparities in wealth, work and aspirations, leads to dissatisfaction, conflict, and deviance.

For Robert Merton in 1938, the term anomie, meant a discontinuity between cultural goals and the legitimate means available for reaching them. Applied to Western cultures, the emphasis on the goal of monetary success but without the corresponding emphasis on the legitimate avenues to march toward this goal, stimulates a huge sense of normlessness. In other words, many people in a society may aspire to be viewed as 'success' models, flaunting the badges of such success, but the ways in which people go about obtaining those success symbols are not the same, because not everyone has the same opportunities and advantages as the next person. This leads almost inevitably, to deviance.

Such deviance is not contained to the underclass however. Other members of other social groupings will also commit crimes to achieve success (Insider Dealing, Market Manipulation, Money Laundering, etc) but in this article we are looking at the riot and looting impulse, which is largely, but not exclusively an underclass phenomenon.

A significant amount of the violence and looting appears to have been generated by a type of individual, who when interviewed by media representatives, gives dis-jointed explanations for his conduct. What does come across most clearly is that they appear to have no concern for the likely consequences, if they were to be arrested. It is almost as if they view the likelihood of a custodial sentence as an inevitability in their life, indeed, many of them may already have experienced such a phenomenon. So the first observation is that they do not appear to have any fear of even the most severe social interventions. These are young people with nothing to lose, so through looting, they have everything to gain! It is another form of terrorism, where ordinary people are put in fear, where extreme violence is routinely used, but the ambition is greed.

Another observation is that they all aspire to the very trappings of success which are denied to them by their rejection of the education process, thus exacerbating their inability to get jobs. They target shops selling expensive training shoes, gold and jewellery, electrical goods, mobile phones and computers, all the detritus of the 'celebrity' status which they so earnestly crave.

They loot shops because they can, and when there are enough of them, acting in concert, there is very little to stop them. These actions are fluid, they differ from ordinary political riots where the aim is to confront authority, these are more like hit and run tactics, always moving, thus making them much, much harder to Police and control.

Government must begin to address the very real problem of social inequality. Just providing more hard-pressed tax-payersmoney in the form of welfare benefits is not the answer. The welfare states which for the last 60 years have provided our social environment with cradle-to-grave protections in terms of health, education and social welfare are now facing insolvency. Putting it at its simplest, they are running out of money, while at the same time, they are having to face up to the likelihood of a future in which fewer individuals will be either willing, or indeed available to provide the necessary degree of funding to continue to maintain those benefits at even contemporary standards.

Politicians must begin to recognise that in many areas of our country there are communities with no possible likelihood of work, no real care for the future, and whose many unplanned children are born into social dysfunctionality which no amount of intervention will prevent. These feral communities have no fear of authority, they are inured from their earliest days to consider all forms of social control as something to be rejected and they will continue to provide the means for further riots and looting in the future, as they begin to realise what they can achieve by these actions.

When we begin to recognise that a new form of terrorist warfare is being developed, then we can begin to define ways of dealing with these individuals!

Sunday, August 07, 2011

A recent report in June 2011 by FSA, identified serious weaknesses in the management of important compliance requirements, across a wide range of banks and financial institutions.

Specifically, with regard to client identification issues, PEP handling, correspondent banking and wire transfer activity, the Report found significant short-comings in a large number of banks reviewed.

The FSA stated; '... We will, where appropriate, use our enforcement powers to reinforce key messages in this report to encourage banks and other firms to strengthen AML systems and controls and deter them from making decisions which do not take adequate account of money laundering risk...'

That Report should have been an alarm bell in the night for those banks whose failures to provide adequate preventative provisions, bring themselves within this category.

But how has it got to this state of affairs in the first place?

Well, the first people to be blamed are the FSA themselves. They have consistently failed to enforce the AML Regulations with any degree of rigour. They have continued to issue discussion documents when they should have been giving these banks a serious going over for failure to adhere to the Regulations.

This meant that the banks only implemented compliance controls in a fairly piecemeal fashion, and with no great degree of willingness to spend any realistic sums of money on implementing truly effective controls.

Yes, the regulators did issue fines and costs from time to time, but it is pointless fining a bank. They can always pay the fine, and then pass on the cost right back to their customers. If all a Regulator does nothing more than impose a fine which the institute has no difficulty in paying, then they only have themselves to blame for allowing this dreadful state of affairs to flourish. They have always failed to understand the culture of the banks they supervise.

Let us start by recognising the most basic of all truths which attach to the banking sector's willingness to engage voluntarily with financial regulatory requirements - particularly as they pertain to anti-money laundering - they just don't give a damn about it. Consider these quotes from the FSA report;

'... Some banks appeared unwilling to turn away, or exit, very profitable business relationships when there appeared to be an unacceptable risk of handling the proceeds of crime. Around a third of banks, including the private banking arms of some major banking groups, appeared willing to accept very high levels of money-laundering risk...'

'... Our main conclusion is that around three quarters of banks in our sample, including the majority of major banks, are not always managing high-risk customers and PEP relationships effectively and must do more to ensure they are not used for money laundering. Despite changes in the legal and regulatory framework a number of the weaknesses identified during this review are the same as, or similar to, those identified in the FSA report of March 2001 covering how banks in the UK handled accounts linked to the former Nigerian military leader, General Sani Abacha.We are concerned there has been insufficient improvement in banks’ AML systems and controls during this period...'

By far the most egregious however was; '...At a few banks, the general AML culture was a concern, with senior management and/or compliance challenging us about the whole point of the AML regime or the need to identify PEPs...'

What these three statements identify so clearly is that the British banking fraternity have together stuck two fingers up to the law and the regulations which seek to prevent criminal money from being moved through our institutions. It's not an accident, it's not inadvertent, it is deliberate, concerted and done with the most simple motive, greed!

So, what happens when the FSA has been in and conducted an Arrow review? When the glaring lack of any meaningful controls has been identified and highlighted; when the absence of any realistic transaction monitoring IT systems is discovered; when the KYC processes ignore more than they recognise, then there should only be one way forward.

Such an absence of controls is primary evidence of a wholesale policy of deliberate evasion of the law, with the aim of generating even more financial gain, in other words, an exhibition of organised criminality.

That conduct should be treated in the same way as other major organised criminals. The Chief Executive should be invited in to a meeting at the FSA and promised that unless his systems and controls are brought into an acceptable condition within a short space of time, with the proper trained staff to operate them, then he and his main Board will be prosecuted for the failure to implement the necessary degree of controls, and a custodial sentence sought.

This may sound draconian, but I believe that it is the only way to engage the hearts and minds of these executives who are willing to deliberately ignore the law in the name of profit. They have had years to get their act together and they have wilfully ignored the requirements.

So, let them spend some time in Wandsworth. It won't take long for the message to get round the other institutions, which would trigger off a Gadarene-like rush to start to undertake the remedial exercises properly. Such a criminal conviction would disbar these men from any further role in the City or the banking sector, and it would predicate a period of wholesale reform in the boardrooms of every banks in the country.

So, let us hope that those with the power to enforce the Money Laundering Regulations start to view some of the most egregious financial institutions who fail to demonstrate that they are taking the implementation of proper remediation, as the organised criminals they undoubtedly are, and deal with them accordingly. It would be amazing what a few weeks banged up would achieve!

About Me

Having spent my career dealing with financial crime, both as a Met detective and as a legal consultant, I now spend my time working with financial institutions advising them on the best way to provide compliance with the plethora of conflicting regulations and laws designed to prevent and forestall money laundering - whatever that might be! This blog aims to provide a venue for discussion on these and aligned issues, because most of these subjects are so surrounded by disinformation and downright intellectual dishonesty, an alternative mouthpiece is predicated. Please share your views with what is published here from time to time!